* See Memorandum to Closed-End Investment Company Committee No. 19-98 and SEC Rules Committee No. 92-98, dated
September 18, 1998.
1
[10359]
October 7, 1998
TO: CLOSED-END INVESTMENT COMPANY COMMITTEE No. 21-98
SEC RULES COMMITTEE No. 99-98
RE: ICI COMMENT LETTER ON SEC PROPOSED AMENDMENTS TO RULE 15a-4
______________________________________________________________________________
The Institute recently filed with the Securities and Exchange Commission the attached comment
letter on the Commission’s proposed amendments to Rule 15a-4 under the Investment Company Act of
1940. The rule permits an investment adviser to a fund, in certain circumstances, to serve temporarily
under an interim contract that has not received shareholder approval. The proposed amendments
would, among other things, extend the rule to adviser mergers and increase the time period during which
the adviser may serve under a contract without shareholder approval from 120 days to 150 days. The
letter is substantially similar to the draft letter previously circulated to you.*
Adviser Mergers
The Institute’s letter generally supports the Commission’s proposal, but recommends certain
changes. For example, as proposed, the amendments would impose certain conditions on the interim
contract and require a fund’s board to find that the scope and quality of advisory services to be provided
under the interim contract will be equivalent to the scope and quality of services provided under the
terminated contract. The letter supports the Commission’s overall objective of protecting shareholder
interests but recommends against requiring fund boards to make specific findings in favor of a finding
that the interim contract is in the best interest of fund shareholders.
The proposed amendments also would impose an escrow requirement on advisory fees under
the interim contract and would permit advisers to receive only the cost portion of their escrowed fees in
the event a fund’s shareholders disapprove the successor contract. The letter supports the
Commission’s proposal to permit an adviser to be compensated for providing advisory services to a fund
even if the successor contract is not approved, but opposes limiting that compensation to the adviser’s
actual costs. The letter explains that where an adviser performs bona fide services to a fund and where
the fees imposed under the interim contract do not exceed the fees paid under the previous contract,
which had
already received board and shareholder approval, permitting the adviser to earn a reasonable profit
should not be objectionable. The letter adds that this recommendation also would obviate the need for
the proposed escrow arrangement.
2Board Approval
In the case of an unanticipated assignment of an advisory contract, the proposed amendments
would provide the board up to seven calendar days in which to approve an interim contract. The letter
generally supports this proposal but recommends that the grace period be extended to ten calendar days
instead, so as to allow the board more time to make an informed decision. The letter also supports the
Commission’s proposal to facilitate a special board meeting by permitting board participation to occur
via telephone or similar means of communication that allows all participants to hear each other at the
same time.
Length of Exemptive Period
The letter supports the Commission’s proposal to increase the maximum number of days the
adviser can serve under an interim contract without shareholder approval, but recommends that the time
period end as of the last day of the month in which the 150th day falls. The letter explains that this
approach would minimize disruptions to the orderly management and administration of a fund by
coordinating the termination period of the interim contract with a fund’s normal financial, compliance
and reporting cycles.
The letter also suggests that, to avoid possible ambiguity in the case of adviser mergers, the
Commission should specify when the exemptive period begins. It recommends that the time period
should begin on the date the previous contract terminates.
Barry E. Simmons
Assistant Counsel
Attachment